My former boss wrote in this newspaper four years ago that economic reality would quickly bite for any government that tried to freeze energy prices.
Investment would dry up, as energy firms lost confidence that they would see sufficient returns, companies would face enormous losses if the wholesale price of energy spiked, and it could even raise the already serious risk of blackouts.
And while the Conservatives’ proposed energy price cap is less awful than the policy put forward by Ed Miliband in 2013, since it only applies to standard variable tariffs and lets Ofgem set a price cap every six months rather than politicians simply freezing prices for a set period of time, many of the same problems remain.
Why have we even got here? As Peter Atherton of Cornwall Energy has pointed out, large differentials between the prices consumers pay have become politically unacceptable because energy is viewed as an essential service for which poor and loyal households pay the most. What would qualify as competition in most other markets just isn’t deemed to be enough. In isolation, price differentials might be tolerable, but when combined with a general trend of rising prices, caps become politically irresistible.
But claims from supporters of the policy that switching providers is hugely complicated and time consuming are nonsense. I’ve done it twice myself in the past three years, saving around £400 a year for a two bedroom flat. The whole process took around five minutes and can be done online or over the phone.
Either people don’t realise how easy it is to switch or don’t care enough to bother. There is no evidence of market failure and the Prime Minister’s claim that bills only ever go in one direction is simply wrong. Granted, in the long run, costs will increase. But in 2015 all of the Big Six cut prices as the wholesale gas price tumbled.
What makes the proposals more worrying is the existing evidence that the government simply does not understand the consequences of its actions. Most obviously, one of the Prime Minister’s first acts after entering Downing Street was signing the country up to the most expensive conventional power station in the world at Hinkley Point.
But the problem is more fundamental. Meeting government emission targets requires rapid decarbonisation of the power sector so that, by 2030, 75 per cent of electricity generation comes from low carbon technologies such as renewables and nuclear. In 2016 they accounted for 37 per cent so there’s a long way to go.
Getting there requires hundreds of billions of pounds to be invested by the private sector in new generating capacity. This has to be paid for and that means higher profits and higher prices for consumers. The entire policy framework relies on higher prices, but policy-makers either do not understand this or are unwilling to defend the decisions they’ve made. Big business provides a politically expedient scapegoat.
And there is simply no evidence that energy companies are making “excess profits”. The latest figures available from Ofgem show that Centrica’s post-tax profit margin on its supply business was 4.2 per cent in 2015. Indeed the scope for ripping customers off is pretty limited considering that nearly 90 per cent of the operating costs incurred by the Big Six are fuel, environmental and social obligations, and network costs.
If the requisite investment is to be forthcoming and the price of standard variable tariffs is to be capped by Whitehall diktat, the costs of fixed tariffs will have to increase. The government will simply be decreeing that a different group of consumers are “ripped-off”.
The implausibility of Britain’s current energy policy is becoming increasingly clear. The economics underpinning the policy goals has been completely shot, not least because fossil fuel prices are far lower than was imaginable 10 years ago. The best possible outcome from the Conservatives’ new energy price cap is bringing forward the point at which politicians realise that consumers are not willing to pay for their folly.